Can the Cloud Help Small Businesses?

Storage Services Save Money, but Complaints Include Security, Lack of Control

By

Cicely K. Dyson

Updated Jan. 9, 2013 7:24 p.m. ET

When USstoragesearch.com, a 58-employee property-storage business, went national in 2004, business-development director Bill Hipsher didn't expect to be spending more than $25,000 a month on information technology within a few years. New software, and the need to manage and maintain servers, required him to look for outside IT support and thus kept the Omaha, Neb.-based company from growing as fast as he'd hoped.

ENLARGE

Bill Hipsher, business-development director at US Storage Search, has used online call-center and storage services to reduce IT spending.
Matt Miller for The Wall Street Journal

Nearly two years ago, Mr. Hipsher moved some of the operations off the company's own servers and onto the cloud, using services like inContact to operate its call center and Rackspace Hosting Inc., which US Storage Search uses to operate 400 separate websites that it owns or manages for other companies.

As a result, Mr. Hipsher says the company—which helps people compare and book physical storage facilities online—is saving up to $7,000 a month on IT, can afford to cut back on third-party IT services and expects to add up to 40 jobs this year.

"We've been able to reinvest into what we make," he says. "Every dollar that we've made we've pretty much sunk back into what we have."

There's nonstop chatter, often funded by the cloud-service industry itself, about the new world of the cloud, in which businesses outsource their computing muscle to a third party. Much of the discussion has been around stories like that of Mr. Hipsher, where a small business saves substantially and can then invest the savings elsewhere in its business.

For many small businesses that have used the cloud for a few years, the experience has largely been positive, but not without drawbacks. Cloud services run by companies like Google Inc.,Amazon.com Inc.,Microsoft Corp. and Dell Inc. attract entrepreneurs because of their convenience and low startup costs. But some customers complain about security measures and entrepreneurs' lack of control over data.

Data housed in the cloud is stored and processed in centers hundreds or even thousands of miles away from a company's headquarters. While this lets entrepreneurs decide how much storage and processing power they need, it can also be an added frustration for business owners.

"The only downside would be not having direct control over what you're doing," says Mr. Hipsher of US Storage Search. The company still operates about a dozen servers on its premises in Omaha.

The future of IT for small businesses will largely rely on both servers on site and in the cloud. Some small businesses have found using a hybrid of both to be beneficial by backing up data on site and in the cloud. IT costs can be particularly a heavy burden on small businesses, because they don't have the deep pockets of large corporations.

In late June, several users of Amazon Web Services, the company's cloud, were hit with a scare when electrical storms cut power to 10 data centers in northern Virginia and the generators shut down. While any infrastructure can and will have issues, "no amount of downtime is acceptable or our customers," says Adam Selipsky, vice president of AWS.

Small businesses in the U.S. spent $3.5 billion on cloud technology in 2011, up 41% from the $2.2 billion spent in 2010, according to a report by International Data Corp., a technology research firm. In 2012, spending on cloud technology was projected to increase by about 25%.

In 2011, cloud spending by small businesses in the U.S. accounted for around 7% of the $53 billion that was spent on all IT expenditures. IDC defines a "small business" as one with fewer than 100 employees.

Operating servers both on-site and in the cloud is "a very effective way of reducing risk," says Michael Harries, chief technologist at Citrix Startup Accelerator, a Silicon Valley investment firm that works specifically with software startups. Business owners should make the decision based on the "support they have available," he says.

Harpaul Sambhi, chief executive of social-media recruitment firm Careerify, says running his company solely in the cloud has allowed him to focus more on business growth. Careerify allows a company to connect to its employees' social networks in order to find candidates for jobs at that company, be it through Facebook, Twitter or LinkedIn. Mr. Sambhi uses Microsoft.'s Windows Azure to support Careerify's storage and data processing.

Mr. Sambhi says because an average employee has about 300 social-media contacts, he didn't want to burden his staff of 12 with trying to maintain servers that are mining the data of hundreds of thousands of users.

"It's a lot of work for us," he says.

Financial benefits and convenience aside, some entrepreneurs are still wary of the security risks. The top drawback for small businesses adopting cloud services in 2012 was data security, according to IDC research.

Louis Barajas, a financial planner in Los Angeles who serves mostly Hispanic and elderly customers, says that while he'd like to incorporate the cloud more into his business, his clients are leery of the technology. Even so much as logging on to their bank accounts online could be a struggle.

"They're all afraid someone's going to steal their information because they don't understand the cloud," he says. "Even if I wanted to, I couldn't get them to."

He says that clients with some understanding of cloud technology are still apprehensive because of the lack of direct control.

"Everybody tells you that the information is safe, and nobody knows where it's going," Mr. Barajas says.

Mr. Barajas operates his on-site Microsoft servers at a cost of $400 per month paid to an outside IT company. To ease his customers' minds about security, the servers are frequently backed up at his company, he says. While his business is mostly operated on in-house servers, he says he doesn't have a choice on using some cloud-based software, such as eMoney Advisor for financial planning.

"Ideally, it would be much simpler to have everything in the cloud," Mr. Barajas says.

Providers still see the value in offering both on-site and cloud servers. Dell, which had 14% growth in its server business in its fiscal third quarter ended Nov. 2, says growth in its cloud business isn't having a major impact on its server-network business.

While Dell acknowledges that some small-business owners would feel safer with an on-site server, Nnamdi Orakwue, vice president of infrastructure cloud service, says Dell has been building better security through acquisitions like SonicWall, which helps customers develop and maintain IT security. The deal was reportedly valued at $1.2 billion.

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